How to Draft a Will – 10 Steps to Choosing a Beneficiary
KEY POINTS
A Legacy for Generations
Your selection of a beneficiary will transcend your legacy and reverberate across generations.
Multiple Beneficiary Types
Estate planning mechanisms offer the flexibility to designate a variety of beneficiary types, making it possible to achieve even the most sophisticated estate planning objectives.
The Art of Choosing a Beneficiary
Refine your skills in making strategic decisions regarding choosing a beneficiary, and ensure you achieve your estate planning goals.
Welcome
Imagine your wealth as a torch, lighting the way for your family's future generations. Your choice of beneficiary isn't just a matter of convenience; it's the living embodiment of your legacy.
With the right beneficiary in place, your financial torch can burn brightly, ensuring that the fruits of your labor span not just years, but generations to come.
Join us while we explore how to choose a beneficiary strategically, breathing life into your legacy and illuminating the path for your descendants to thrive.
What is a beneficiary?
A beneficiary is a person, organization, or charity formally appointed in the will to receive a portion of the estate.
Choosing your beneficiaries wisely is a critical component in the estate planning process.
Types of Beneficiaries
The following types of beneficiaries are common and can facilitate achieving complex estate planning objectives,
Legal Beneficiary
A person or entity that is specifically designated to receive assets as outlined in the will.
Primary Beneficiary
This is the first and foremost person(s) or entities named in a will to receive assets or benefits. Such typically includes the spouse, children, or other family members.
Contingent Beneficiary
A contingent beneficiary is entitled to receive assets if the primary beneficiary becomes ineligible or unwilling to accept the inheritance. This entitlement is contingent upon specific conditions specified in the will, which could include situations such as the primary beneficiary passing away before the secondary beneficiary, being untraceable, or refusing the bequest.
Residuary Beneficiary
A residuary beneficiary receives the remaining assets after all distributions have been made to the primary and contingent beneficiaries.
Charitable Beneficiary
Refers to a charitable organization or cause that is designated to receive a portion of the estate.
Composite Beneficiary
An individual or entity appointed in the will to receive assets based on a combination of the roles above. For example, they may be a primary and contingent beneficiary.
10 Steps to Choosing Beneficiaries
Choosing beneficiaries is a significant and complex decision. Several key factors should be considered to ensure that your wishes are executed as desired.
Here are 10 important steps to take when selecting a beneficiary:
1. Asset Inventory
Understanding your assets thoroughly, including their nature and value, is essential for making informed decisions about their distribution from your estate. This step can yield benefits such as,
Completeness
The risk of omitting an asset from your estate planning endeavors is reduced when you diligently collate a comprehensive asset listing.
Fair Distribution
An equitable distribution amongst multiple beneficiaries is often desired and can help mitigate potential future disputes.
Sentimental Bequests
It may be beneficial to categorize assets based on your intention to bequeath them in their current form or have them liquidated into cash and disbursed accordingly.
Asset Management
You may choose to not liquidate certain assets and bequeath them to individuals capable of managing them. For example, you may want to designate a specific beneficiary to inherit a rental property or operating business.
Tax Planning
It may be prudent to engage a professional tax advisor on complex estates to ensure the tax burden is minimized prior to the assets being disbursed to the beneficiaries.
2. Estate Goals
Your initial thoughts regarding potential beneficiaries may change as you consider and establish your overall estate goals. This can be an invaluable exercise as such goals may include,
Financial Security
Distribution of your estate has the potential to provide financial security to various types of individuals in need.
Spouse
Typically, a primary goal is to ensure your surviving spouse has the financial resources to maintain their standard of living, to the greatest extent possible.
Dependent Children
This group may require financial resources capable of sustaining them over a longer period and include support for education and healthcare.
Elderly Parents
These individuals are typically on a fixed income and face continuously increasing costs related to healthcare, housing, transportation, and food.
Vulnerable Individuals
Individuals with disabilities may require financial assistance for the remainder of their lives. Consideration should be given to special purpose trusts and other unique estate planning opportunities.
Equal Distribution to Children
An equal distribution of your estate’s assets across your surviving children is a straightforward approach that can minimize future family disputes.
Education
An allocation of funds supporting educational opportunities can be life changing for family members. Consideration can also be given to the establishment of a trust or endowment to provide financial support to non-family members meeting specific criteria.
Charitable Giving
Your philanthropic legacy can be advanced by allocating part of your estate to specific charitable organizations or causes. This may include supporting the arts, education, healthcare, research, sports, religion, and more.
Business Continuity
Certain individuals may be capable of assuming ownership and management of your privately held company. Such continuity can help ensure your business continues to thrive in your absence.
Family Heritage
The decision to bequeath specific sentimental items to select individuals can ensure your legacy and the family’s heritage extends to the next generation.
Caregiver Honorarium
A token of appreciation and recognition can be allocated to select caregivers that helped you or your loved ones.
3. Identify Potential Beneficiaries
Make a comprehensive list of all potential beneficiaries which may include family, friends, charitable organizations and causes, or businesses.
Valuable insights into the process can be gained from Steps 1 and 2 above while ensuring your beneficiaries are aligned with your overall estate planning goals.
4. Partner Consultation
It is generally a good idea to discuss your choice of beneficiaries with your partner as it ensures you are on the same page and aware of each other’s wishes and responsibilities. Differences of opinion may arise and investing time resolving these issues can mitigate potential future conflicts.
Start Early
Initiating this conversation well in advance is highly advisable. There's no need to delay these discussions until later stages; in fact, some individuals begin these conversations even before drafting their wills.
Compare Priorities
Each party will have their own set of goals, as discussed in Step 2. You may uncover significant disparities related to the importance attributed to each goal.
Prepare to invest a substantial amount of time in collaborative decision-making. Achieving an outcome aligned with your will's provisions may necessitate compromise and an extended timeline.
5. Conflicts of Interest
It is critical to assess actual or perceived potential conflicts of interest that may exist and consider these with your partner prior to finalizing your decision. The following examples are common conflicts that families must address,
Business Ownership
Conflicts of interest may arise between the beneficiaries if you bequeath an operating business to multiple beneficiaries, and they may have competing interests to either sell or maintain ownership.
Bloodlines
Conflicts can also arise if different estate allocations are made based on bloodlines (e.g., son vs. stepson).
Financial Security
Beneficiaries may be experiencing vastly different degrees of personal financial security. This may impact each beneficiary’s perception of how the estate should be allocated.
6. Finalize List of Beneficiaries
You should be well-positioned to finalize your list of beneficiaries if you diligently worked through the above steps. Make your list and document how you arrived at your decision.
7. Allocate Assets to Beneficiaries
The next crucial step involves the allocation of assets identified in Step 1 to your selected beneficiaries. The estate goals you established in Step 2 will serve as a solid framework to guarantee the distribution of assets among each designated beneficiary is aligned with your legacy goals.
8. Inform Beneficiaries
Meeting with the beneficiaries, individually or as a group, to explain your decision to include them as a beneficiary can be a sensitive but crucial step.
Be clear and honest about your thought process, while highlighting the specific reasons for your choices, whether it's to provide financial security, honor a family tradition, or support a cause you are passionate about.
Encourage open dialogue and answer their questions in a clear, concise, and transparent manner.
9. Documentation
Document your decision-making process and any agreements made as such may be required in future legal proceedings.
10. Review and Reassess
Circumstances change. Periodically review your decision to ensure it remains appropriate. Be willing to make changes, if necessary, to protect your estate and its distribution.
FINAL THOUGHTS
Your legacy extends beyond your wealth, spanning across future generations. Selecting the ideal beneficiary is not a simple task but a crucial one. Thoughtful planning can illuminate the path for your descendants to prosper.
